Modest services activity suggests sluggish growth

A lacklustre performance in Britain’s dominant services sector only just beat expectations in July – positioning the economy for a “steady but sluggish” growth in the third quarter, figures show.

Monthly purchasing managers’ index (PMI) data from Markit/CIPS UK Services showed higher than expected growth in the industry with a reading of 53.8, up from a four-month low of 53.4 in June.
A reading above 50 indicates growth. Economists had forecast a figure of 53.6 for the sector, which represents more than three-quarters of output.
The outlook comes as Britain’s factories enjoyed a bounce-back in July thanks to the strongest surge in export orders for more than seven years, but the construction sector slumped with political and economic uncertainty dragging on demand for new projects.
Chris Williamson, chief business economist at IHS Markit, said: “Taken together, the three PMI surveys are broadly consistent with economic growth of just over 0.3%, putting the country on course for another steady but sluggish expansion in the third quarter.”
But he warned that “while the current picture remained one of an economy showing overall resilience in the face of concerns about the outlook, the subdued level of business optimism suggests it’s likely that growth will at least remain modest and could easily weaken in coming months”.
He added: “Firms’ prospects for the coming year have slipped to a level which has previously been indicative of the economy stalling or even contracting, having taken a lurch downward since the General Election, largely reflecting heightened uncertainty about the economic outlook and Brexit process.”

Image: The construction industry has been hit by political and economic uncertainty
Duncan Brock, of the Chartered Institute of Procurement and Supply, which compiles the survey with researchers Markit, said: “Hopes of a stronger performance in the latter half of the year are ebbing away, with business confidence close to its lowest since 2012.

“July’s data has presented a worryingly mixed bag of results reaffirming the impact economic uncertainty and the weak pound can have.”
Higher operating costs driven by rising food prices, energy bills and salary payments did not stop employers in the services sector from taking on more staff, with job creation seeing its strongest growth for a year-and-a-half.
Several firms cited a rise in sales thanks in part to new product launches, some said stretched household budgets and post-election uncertainty and worries about the economic outlook had “dampened client spending”.
A number of companies said they had difficulties filling current vacancies with suitably skilled staff, while “a sizable monitory also noted that Brexit-related uncertainty continued to weigh on their growth prospects for the year ahead”.
Howard Archer, chief economic adviser at the forecasting group EY Item Club, said the data from all three surveys pointed to “a UK economy continuing to struggle to get out of a low gear”.
Sterling lifted 0.2% to 1.32 US dollars and was up 0.3% against the euro at 1.12 after the latest figures were published.
Data released by the Office for National Statistics last week recorded a 0.9% drop in construction in the three months to June, a 0.5% fall in manufacturing output during the same period, while the services sector expanded by 0.5%.